Credit Markets: Income, but be selective
US Investment Grade Credit
Higher-quality corporate bonds, particularly in the United States, remain relatively stable. Resilient earnings have supported this segment, although dispersion between stronger and weaker issuers is becoming more pronounced.
What this means for portfolios: Investment-grade credit remains an important source of income, with positioning focused on financially robust companies offering predictable cash flows.
US High Yield Credit
High-yield bonds continue to offer attractive income, but with elevated risk. Slower earnings growth and higher leverage levels mean some issuers may come under pressure should conditions tighten further.
What this means for portfolios: Exposure is best directed toward shorter-dated bonds to manage refinancing risk and reduce sensitivity to the economic cycle.
Government Bonds: Focus on the US
Government bonds outside the US continue to offer limited real return potential in an environment of persistent inflation. By contrast, US government bonds still play a valuable role in providing stability and diversification within portfolios. However, yields have moved higher, reflecting ongoing inflation pressures, partly driven by elevated energy costs.
What this means for portfolios: Portfolios maintain a preference for US government bonds as a core source of diversification and stability.
Emerging Market Debt: Less attractive than before
Emerging market debt has become less attractive as currency weakness, higher energy costs and a stronger US dollar weigh on returns and increase volatility.
What this means for portfolios: Positioning remains cautious, with a preference to wait for improved currency stability and more attractive valuations.
